Keeping score on the DOJ case

For those of you keeping score at home, Macmillan has officially agreed to settle in the DOJ case.

Since Bob Brown’s “Readies” (1930) and Alan Kay’s Dynabook (1972), people have been looking for a device that can hold books and other electronic content alike. In the last six years, this has evolved into a competition between Amazon and Apple for the leading device; to gain control of the market, they’ve worked with publishers to set competitive prices for ebooks that might give one of their devices an advantage.

The race for the leading device is key here: In November 2007, Amazon released its first generation Kindle for $399. The second generation was released in February 2009, and the price dropped to $259 by October 2009. To bolster Amazon’s market share, books were priced at $9.99. Amazon controlled approximately 90% of the ebook market by the beginning of 2010.

Apple announced its first iPad in January 2010. Publishers met with Amazon before the device was released and devised the “agency model” — wherein Apple would take 30% of the price publishers set for each ebook. Macmillan’s CEO, John Sargent, flew to the West Coast to ask Amazon to convert to the agency model as well; while he was on the flight back to New York, Amazon removed “buy” buttons for all of Macmillan’s titles.

Sargent took out a full-page ad to explain Macmillan’s battle with Amazon to the reading public. About a week later, an Amazon message board statement said Amazon would return the buy buttons to the site because Macmillan held “a monopoly over its own titles.”

It seemed Amazon and Apple would operate under the agency model, along with other retailers. In April 2012, the Department of Justice brought a civil charge forward suggesting that publishers conspired with each other and Apple, in violation of federal anti-trust laws (specifically the Sherman Act), to set the price of e-books on Apple’s iBookstore at a higher level than Amazon.com’s $9.99. Publishers Lunch pointed out it was actually a charge on two conspiracies — one in September 2008 regarding a “joint venture” to sell ebooks together; secondly, replacing the wholesale model with an agency model.

Though Apple is not likely to take a major financial hit after the settlement (it represents about 10 percent of the e-book market according to analysts), Amazon stands to gain upward of $1 billion in revenue, according to Cowen & Co. analyst Jim Friedland.

And in April 2012, Hachette, HarperCollins, and Simon & Schuster decided to settle with the DOJ. In October 2012, Amazon sent word around that refunds were coming for consumers, issued by those three publishers. Two publishers held out: Penguin and Macmillan.

Once again, John Sargent issued a public statement, suggesting the DOJ’s terms would allow “Amazon to recover the monopoly position it had been building before our switch to the agency model,” and he would do his best to prevent this from happening. With Borders’ closing in July 2011, Amazon’s share of book spending rose from 23% in the first quarter of 2011 to 29% in the first quarter of 2012. By November 2012, it held 11% over B&N.

In October 2012, Penguin announced its merger with Random House. In the settlement that followed, Penguin maintained that “it had done nothing wrong and has no case to answer.” And last Friday, John Sargent released a statement that Macmillan had no choice but to settle, either.

First, the settlement called for a level of e-book discounting we believed would be harmful to the industry … When Random House agreed to be bound by the Penguin settlement, it became clear that all five of the other big six publishers would be allowing the whole agent’s commission to be used as discount, and Macmillan’s stand-alone selling at full agency price would have no impact on the overall marketplace … The second reason was simpler. I had an old fashioned belief that you should not settle if you have done no wrong. As it turns out, that is indeed old fashioned.

Apple will be headed to trial alone in June 2013. We’ll see then whether publishers’ arrangements to set prices for books is considered illegal.